Change or die, a quote by Alan Deutschman perfectly sums up the importance of embracing change on your way to success.
The thing is that success isn’t an end game but an ever-evolving process, which means that you have to work hard in order to stay on top of your game. The same applies to the period after you retire, and it’s up to you to plan ahead and think about the future of your company and the wealth you accumulated.
Succession planning is the process that allows you to pass the leadership to someone from your family or a loyal employee, thus making sure that your company will stay in good hands after you withdraw from your position.
In order for this transition to go smoothly, it’s essential to consult your accountant.
Why Do You Need an Effective Succession Plan?
Most large companies have a succession plan in place, but owners of smaller, family businesses usually aren’t ready for this big step and don’t know what their options are.
Stats say that only 35% of organizations have a formalized succession planning process.
That’s the reason why only a small portion of them manage to succeed in transferring family wealth or their business to the next generation.
Knowing how to structure your business interests, optimizing your tax position, and maximizing your pension arrangements are other factors that you should take into consideration when creating an effective succession plan.
They Will Help You Make an Exit Strategy
Business owners aren’t aware of how long it takes to prepare a succession.
It’s an accountant’s role to inform you that the sooner you have a plan in place, the better. We’re talking about years, which is why working on this document should be among your top priorities. In other words, don’t wait until you’re 65 to start working on this process.
For most business owners, the idea that they will have to leave their business and hand over the reins to somebody else, even though it’s a member of their immediate family, can be very emotional.
As you know, there’s no place for emotions when it comes to making important business decisions. That’s where your accountant comes in to help you leave sentiments behind and identify what’s best for you and your business.
It can’t be denied that parting ways with the company you’ve been building and watching grow is a stressful experience. You aren’t sure what exactly is coming and how to overcome potential challenges, and a trusted accountant will take time to explain every single step of the way and assist you in navigating the entire process.
They Will Advise You How to Protect Your Interests
A good succession plan will make sure shareholders’ interests are protected. This is particularly important if you want to keep some control of the company after you retire.
Family business succession consists of two important stages – transitioning the management and ownership of your company. These two can happen simultaneously, but it’s better for management succession to come first.
This phase can take anywhere between three to five years, and during that time, you can help your successors learn the ropes and gain some useful experience in running a business. Given that you’ll be by their side to break them in properly and see their progress, you’ll feel more comfortable when the time comes to step down officially.
During this period, you’ll also have some time to think about the ownership of your business and discuss with the members of your family whether running a family business is what they want to do. It’s not uncommon to bring in a professional manager to run a family business and keep the ownership within the family.
In this case, your accountant will help you handle ownership configuration, particularly if we bear in mind that a significant portion of your net worth is tied up in the business itself, meaning that it can be challenging to equalize family members who work outside the family business.
They Will Help You Minimize the Tax Hit
You shouldn’t forget that the transfer of ownership incurs tax costs and think about how to cover them.
It’s worth noting that potential tax costs of transfer are considered to be personal costs that have to be funded by you or your successors. In other words, you can’t use the money tied up within the company to cover these costs.
Luckily, there are several tax relief options available, and your accountant’s advice is instrumental in minimizing tax payable on ownership transfers.
Transferring assets can incur the following tax costs:
- Capital Gains Tax (CGT), paid by the person who disposes of a chargeable asset. This includes a transfer by way of gift.
- Capital Acquisitions Tax (CAT), paid by the person who receives an asset by way of inheritance or gift.
- Stamp Duty, which applies when a person transfers the ownership of property and assets.
When it comes to CGT, retirement relief can be applied to reduce the tax costs when you transfer the shares to your children. In case the ownership transition takes place before you turn 66, you’re eligible for full relief from CGT when you transfer your shares to your children.
Upon the transitioning of ownership from the first to the second generation, it’s very likely that your company will fall under the category of a family-controlled company, which means that your children will be eligible for a CAT business relief which can significantly reduce the CAT rate.
However, over time, as the control becomes diluted through shareholdings and the ownership includes first cousins and beyond, it’s unlikely that the CAT business relief will apply.
There are numerous other tax considerations when transferring your assets and business ownership, which is why having an accountant can be crucial to finding the best way to minimize your costs.
Succession planning is a complex and challenging process that can determine how your business and its legacy will be managed after you retire, and having a team of different experts, including legal and business consultants, is a must if you want to have a smooth transition. An accountant should be a core member of this team in order to deal with the financial part of the arrangement.